Aditya Birla Capital: Advantage of a financial conglomerate

NBFC, asset management, life insurance and housing finance are among the fast-growing businesses

There are quite a few conglomerates in India, but very few in the financial services space. The listing of Aditya Birla Capital (ABCL), however, offers an option to investors in a space largely dominated by HDFC, Reliance Capital and lenders such as ICICI Bank, Axis Bank and State Bank of India.

While ABCL may not seem to have had an exuberant debut on Friday, with its stock hitting the lower-end of the circuit filter (meaning there were no buyers) and closing at ~248.15, it is more of a technical issue due to realignment of a global index following ABCL’s separate listing. Some profit-booking by investors who were allotted ABCL shares is also not ruled out given the surge in valuations in the past two months.

Long-term investors, however, wanting to mop up shares of a scalable financial services firm could still consider the stock once it settles. After listing, ABCL’s market capitalisation (m-cap) of ~54,616 crore makes it the 53rd most valuable company in India, slightly ahead of Hindalco. The latest mcap, though much higher than the market value of ~32,000 crore in end-June when PremjiInvest bought a 2.2 per cent stake in ABCL, indicates that the stock still trades at a reasonable 1.6x FY17 price-to-book.

Also, there is potential for asset monetisation, particularly for insurance and AMC businesses. But, investors will have to be patient as ABCL is not looking at it currently. Ajay Srinivasan, its chief executive, says, “Investors have access to a unique range of businesses through ABCL and therefore there is no need to create access to any single business separately.”

But, what’s more important is that ABCL has presence across key segments such as asset management (AMC), life insurance, housing finance (HFC), and a non-banking finance company (NBFC), all of which are at the right phase of growth and expansion.

The way in which each of the businesses have evolved and how some have undone the mistakes of the past is also interesting. For instance, after suffering an existential crisis in 2010, when regulations pertaining to unit-linked insurance products (Ulips) were overhauled, ABCL’s life insurance business witnessed 30 per cent fall in new business premium in FY11, as 95 per cent of its product offerings were Ulips. It may be noted the event impacted most private life insurance players with the impact varying based on their exposure to Ulips. Embedded value (EV) of ABCL’s life insurance business plunged to ~3,220 crore in FY14, from ~4,110 crore in FY11. However, EV has now stabilised at ~3,430 crore in FY17, with the share of Ulips reducing to 30 per cent, because of the constant efforts from the management. Analysts at JPMorgan are confident that the product mix shift towards traditional products and operating leverage should drive earnings improvement.

The blip in the life insurance business has been compensated by its AMC business, which boasts of ~2.1 lakh crore of assets under management (AUM). Constant market share gains and improving profitability are the biggest strengths of this business. However, Kotak Institutional Equities believes there is room for improvement, as peers HDFC AMC, ICICI Prudential and Reliance Nippon AMC have operated at 17–32 basis points (bps) of reported net profit over average AUM (a key profitability measure) in the past four years, whereas that of Birla Sun Life AMC is 12–15 bps.

While the above businesses are fairly old and mature, though improving, its NBFC and HFC are seen as the key drivers. Between the two, the HFC loan book is young and unseasoned. Until now, it has had high dependence on employees of the Aditya Birla Group companies, though the loan book has expanded to ~4,136 crore in FY17, from ~142 crore in FY15 (the year of commencement).

NBFC operations under Aditya Birla Finance is ABCL’s marquee entity. Not only has its loan book rapidly expanded to ~34,700 crore in FY17, from ~1,000 crore in FY10, its relevance to ABCL’s financials has also increased. Also, 64 per cent of ABCL’s book value draws support from the NBFC. Analysts at Axis Securities believe the NBFC would continue to grow significantly, above the industry trend, recording 25 per cent compounded annual growth in the next five years. “Growth would be driven by product expansion, larger share of loans to small and medium enterprises and retail segments and expansion into new geographies,” the analysts add.

Currently, the bias is towards large- and mid-corporates (54 per cent of loan book). Despite this, the asset quality is impeccable. FY14 was the last year of over one per cent gross non-performing assets ratio. Since then the ratio is well under check and stood at 0.5 per cent in FY17. Return on assets at 2.1 per cent and return on equity of 15.8 per cent also augurs well.

Overall, with most businesses having good growth potential, the coming years would be interesting from the perspective of sustainability and scalability.